ECB directors face interest rates decision

Date: 28/05/1998

By Tim Jones

THE six-member directorate of the European Central Bank will meet next week to decide if interest rates in the euro-11's heartland will have to rise.

The newly installed team, led by President Wim Duisenberg and his deputy Christian Noyer, will meet on Tuesday (2 June) to consider whether Germany and France should begin pushing up their short-term interest rates, now standing at 3.3%, to 'converge' with rates of more than 5% operating in Italy and Ireland.

German and French policy-makers have long stated that interest rates should converge on the lowest operating in the euro-11; effectively calling on Italy, Ireland, Portugal and Spain to get their rates down to 3.3%.

However, recent statements from Bundesbank president Hans Tietmeyer that his bank should start setting policy with the whole of the EMU-zone in mind may signal a switch in Frankfurt opinion.

Although economic growth has started to pick up in Germany and France, economists have not detected any signs of a resurgence of inflationary pressures.

Recent research within the euro-11 area by investment bankers Salomon Smith Barney suggests that "inflation will remain tamed this year and next" as unused industrial capacity keeps wage growth under wraps and the expected rise in the exchange rate of the euro caps import prices.

The bank forecasts annual EMU-zone inflation of 1.5% in 1998, rising to just 2% next year, within the definition of 'price stability' outlined by Duisenberg and his team during their confirmation hearings at the European Parliament earlier this month.

Nevertheless, initial research by executive board member Otmar Issing, who is set to become the ECB's chief economist, is sure to confirm that price trends are diverging significantly among different sectors within the 11 states.

Prices of many manufactured goods including clothing and furniture are rising at an average rate while those of a few others, such as computers and electronic equipment, are actually falling. But most services are showing price rises above the average inflation rate.

The findings of the executive board will be put to the governing council of the ECB when it meets on 9 June.

ECB Directorate met on 2.6.98 to decide future policy on interest rates in Euro-11.